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MEETING AMERICA’S NATURAL GAS DEMAND: ARE

WE IN A CRISIS?

HEARING

BEFORE THE

SUBCOMMITTEE ON ENERGY AND RESOURCES

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

SEPTEMBER 14, 2005

Serial No. 109–93

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

GINNY BROWN-WAITE, Florida

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director/Communications Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON ENERGY AND RESOURCES

DARRELL E. ISSA, California, Chairman

LYNN A. WESTMORELAND, Georgia

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

PATRICK T. MCHENRY, NORTH CAROLINA

KENNY MARCHANT, Texas

DIANE E. WATSON, California

BRIAN HIGGINS, New York

TOM LANTOS, California

DENNIS J. KUCINICH, Ohio

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

LAWRENCE J. BRADY, Staff Director

DAVE SOLAN, Professional Staff Member

LORI GAVAGHAN, Clerk

RICHARD BUTCHER, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on September 14, 2005 ..................................................................... 1

Statement of:

Caruso, Guy, Administrator, Energy Information Administration, Department of Energy .............................................................................................. 15

Magruder, Logan, president, Independent Petroleum Association of

Mountain States ............................................................................................ 52

Slocum, Tyson, research director, energy program, Public Citizen .............. 59

Watson, Rebecca, Assistant Secretary for Land and Minerals Management, Department of the Interior ................................................................ 29

Zenker, Michael, senior director, North American Natural Gas, Cambridge Energy Research Associates ............................................................. 44

Letters, statements, etc., submitted for the record by:

Caruso, Guy, Administrator, Energy Information Administration, Department of Energy, prepared statement of ...................................................... 17

Issa, Hon. Darrell E., a Representative in Congress from the State of

California, prepared statement of ................................................................ 4

Magruder, Logan, president, Independent Petroleum Association of

Mountain States, prepared statement of .................................................... 54

Slocum, Tyson, research director, energy program, Public Citizen, prepared statement of ........................................................................................ 61

Watson, Hon. Diane E., a Representative in Congress from the State

of California, prepared statement of ........................................................... 9

Watson, Rebecca, Assistant Secretary for Land and Minerals Management, Department of the Interior, prepared statement of ........................ 31

Zenker, Michael, senior director, North American Natural Gas, Cambridge Energy Research Associates, prepared statement of ...................... 47

(1)

MEETING AMERICA’S NATURAL GAS DEMAND:

ARE WE IN A CRISIS?

WEDNESDAY, SEPTEMBER 14, 2005

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON ENERGY AND RESOURCES, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 2:22 p.m., in room

2154, Rayburn House Office Building, Hon. Darrell E. Issa (chairman of the subcommittee) presiding.

Present: Representatives Issa, Marchant, Watson, and Higgins.

Staff present: Larry Brady, staff director; Lori Gavaghan, legislative clerk; Dave Solan and Chase Huntley, professional staff members; Richard Butcher, minority professional staff member; and

Jean Gosa, minority assistant clerk.

Mr. ISSA. Good afternoon. First, as the Chair I would like to call

this hearing to order. I want to apologize to all of those of you here

for the hearing today because of a conflict by both the chairman

and the ranking member required to be at another vote. Once

again, I want to thank you for being here.

Natural gas prices have been at record highs because of an ongoing tight supply and demand situation in the United States. Hurricane Katrina has put an increased pressure on markets. A healthy

economy has already stressed the capacity of natural gas both here

and abroad. Katrina, though, awakened us to the possibility of a

supply side shock and that we could find a significant portion of

our natural gas supply shut off for a not so short period of time.

According to the Energy Information Administration, we are facing high energy costs this winter, spending on natural gas is forecasted to be 52 percent higher nationwide, with residential consumers in the upper Midwest experiencing an increase of 71 percent

over last year to heat their homes.

U.S. industry will also be impacted by higher prices because it

derives 40 percent of its primary energy from natural gas. Many

industry users do not have the option of switching to other sources

of fuel when natural gas prices rise. As a result of high prices, we

are no longer the world’s top location for making chemicals. We are

now a net importer of chemicals.

Ongoing high prices have also helped to shutter 21 nitrogen fertilizer production facilities and production has moved overseas

along with the highpaying jobs that industry normally has with it.

Hurricane Katrina is not the sole cause for this sobering market

outlook. In fact, the tight supply and demand situation and stubbornly high prices have been an ongoing problem for at least 5

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years. The natural gas market has become a victim of its own success. Most newly-constructed homes are heated by natural gas. It

is a clean burning and efficient fuel compared to other fossil fuel

alternatives.

But the biggest reason for the increase in year-round demand for

natural gas has come from it being the preferred fuel and choice

for electrical generation. Since the 1990’s, for right or wrong purposes, almost every new electric power plant is powered by natural

gas. From 1996 to 2000, the use of natural gas for electricity grew

at an annual rate of 11 percent a year. It is time to diversify away

from natural gas as a cure-all for electricity generation. The recently enacted energy bill is a step in the right direction toward

that goal.

Clearly, events have caused a reexamination, or should cause a

reexamination of our policies and practices in terms of domestic

production. Some producers have suggested that onshore drilling

operations should take place throughout the year rather than being

restricted to seasonal activity, because it may have less of an environmental impact than dismantling, transporting and then rebuilding drilling pads. Likewise, some have suggested that natural gas

exploration and production activities in the Outer Continental

Shelf may have less of an environmental impact than oil drilling.

I would appreciate any comments our knowledgeable witnesses

may have on these activities and others.

The fact is that we cannot meet our current and future needs

without taking a number of positive steps. We must build flexibility

to meet the demand for increasing domestic production. Without a

doubt we must increase imports, at least in the short run, of liquefied natural gas. We must acknowledge that the most important

use of natural gas is for industrial employment. It’s for those items

which do not have substitutes. Certainly, the fertilizer industry,

which today is leaving the United States, is a classic example of

an idustry dependent on natural gas, as is the production of pharmaceutical products and many other chemicals and plastics.

It has often been said that natural gas is too good to burn, and

yet that is what we are doing here today. There is a fundamental

disconnect between our appetite for natural gas and our willingness to make the hard choices to satisfy it. It is time that we look

at these hard choices.

Today we will examine the current and future sources of supply

for natural gas consumed in the United States, as well as the effect

of regulatory policies on domestic production. In short, where will

our natural gas come from and what are the economic implications

of the choices we make to supply our demand for natural gas?

It is often said here in Congress, and I will say it here because

it fits, that we are facing a crisis in terms of adequate supplies,

and with the effect of price on industry and employment we will

be exporting more jobs in the short run. If we don’t take steps, we

will be exporting jobs in the long run. Will homeowners be able to

afford their natural gas heating bills this winter, and if prices continue to skyrocket will they be able to afford it next winter?

Katrina has made an already bad situation much worse. Let us

not continue a policy that makes it inevitably worse even without

hurricanes.

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We all look forward to hearing from our distinguished panel. We

are pleased to have here today the Honorable Guy Caruso, Administrator of the Energy Information Administration at the U.S. Department of Energy. Welcome back again. The Honorable Rebecca

Watson, Assistant Secretary of Land and Mineral Management in

the Department of Interior. Welcome. Mr. Michael Zenker, senior

director of North American Natural Gas at Cambridge Energy Research Associates. Thanks, Michael. Mr. Logan Magruder, president of the Independent Petroleum Association of Mountain States,

and, I might say, a significant California employer; and Mr. Tyson

Slocum, research director of the energy program at Public Citizen.

I look forward to hearing their testimony.

I would now yield to the ranking member, the gentlewoman from

California, for her opening statement.

[The prepared statement of Hon. Darrell E. Issa follows:]

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Ms. WATSON OF CALIFORNIA. Thank you, Mr. Chairman, and

thank you so much for convening today’s crucial, very, very important hearing. This subcommittee will play a vital role in examining

critical issues regarding America’s use of natural gas and its cost

to consumers.

In the upcoming months America will be faced with critical

choices in considering the amount of energy it uses, how much it

pays for it, and what the long-term outlook is for energy consumption in our Nation. Now, we are here to examine the current supply

and demand of natural gas and investigate what we can do to help

America’s consumers from paying such enormous costs for these essential goods.

Energy is in very high demand in the United States, and our

country alone consumes 25 percent of the world’s total energy supply and 24 percent of the world’s natural gas supply. Demand is

not standing still, but it is growing. Our current natural gas consumption rate is steadily increasing and prices are, as you know,

at an all-time high. It is estimated by the Energy Information Administration that this upcoming winter the cost to heat houses

using natural gas will be from 52 percent to 71 percent higher than

it was last year. The price, differentially, depends on your location

in the country. Estimates from the American Council for an Energy

Efficient Economy this year said the cost, adjusted for the higher

transportation, natural gas, and electricity costs, will be an additional $2,105 to the average American household. We are in a situation where people will have to choose between adequately heating

their homes and purchasing the bare necessities for survival. So

this committee must investigate solutions that can help alleviate

this problem.

Why is the United States increasing consumption and paying

these tremendous amounts for natural gas? We have seen prices of

natural gas soar over the past year, with wholesale prices more

than doubling from less than $5 per million Btu last September to

all-time record highs of around $11 today. Energy companies are

taking in revenues at rates never seen before. While I stand by the

American ideal of a free-market society, my constituents should not

be held hostage to heating and rising gas prices that will crush

their household’s budget. So I am greatly concerned, because we

just had this debate with our seniors over prescription drug prices.

Just imagine the added burden for this sector of American society,

in addition to a majority of Americans that struggle just to make

ends meet.

The effects of Hurricane Katrina have also played a huge role in

our offshore natural gas production in the Gulf of Mexico, as well

as onshore natural gas processing facilities. Our energy problems

preceded Hurricane Katrina with tightness resulting from surging

demand over the past few years. What Katrina did was expose underlying problems in our energy markets and infrastructure that

we must address to avoid spreading the pain that has been inflicted upon those in the gulf coast and the broader country. In particular, I reiterate that I am concerned about the impact of higher

energy prices on those least able to absorb the cost.

While much of the focus has been on a single fuel such as today’s

topic of natural gas, the reality is that our problems are much

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deeper and more interrelated. In the past we have been able to

switch between energy resources to relieve tightness in a single

market. What the United States faces now is tightness in all major

energy markets, which has put the country in an energy straightjacket. As a result, we need to look at reducing the demand for all

energy to help rebalance our market.

Like so many of my fellow Californians, I can speak firsthand on

the energy crisis in my home State, which was caused by shortsighted planning. Katrina is a natural disaster of catastrophic proportions. Supply side shock, whether it is by market manipulation,

price gouging, production disaster, or transportation difficulties,

must not be allowed to cripple our country.

Unfortunately, the recently passed energy bill is environmentally

costly, favors large businesses, and contains inadequate solutions

to reduce foreign energy dependence. I ask that we revisit and support responsible legislation that will produce effective long-term solutions.

I am fully aware that our Nation must find alternative energy

sources, but we must do so in a very responsible way and in a way

that will not sacrifice our precious resources such as the Arctic National Wildlife Refuge. We do not need to weaken environmental

responsibility regulations.

According to the Bureau of Land Management, the data clearly

shows that they have issued far more drilling permits than the industry has been able to use. Yes, we are in a crisis, but a crisis

does not mean that we should not act responsibly and reasonably

with due care. As legislators, we should direct resources to the next

generation of science with the knowledge that it will produce more

energy more efficiently with less risk to the environment than the

outdated and wasteful practices of the past.

Refocusing on the topic of the day, the bottom line is we need to

facilitate the short and long-term solutions for effective natural gas

production and consumption while keeping prices affordable.

Mr. Chairman, I look forward to the testimony, and I thank you

for bringing this subject to us today.

I yield back.

[The prepared statement of Hon. Diane E. Watson follows:]

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Mr. ISSA. Thank you very much, Ms. Watson. Is there any other

Member that wants to make an opening statement? The Chair recognizes the gentleman from New York for his opening statement.

Mr. HIGGINS. Thank you very much, Mr. Chairman. I don’t have

a written statement, but I do want to offer some thoughts relative

to perspective.

What you see happening here is indicative of not having an effective energy policy in this situation relative to the demands that our

economy places on the supply of natural gas and oil, which puts us

in a very, very difficult position, from a practical standpoint, and

from an economic standpoint.

If you look at the history of this economy, any time natural gas

prices and oil prices increase from 50 percent from the year before,

the world economy and the national economy go into recession.

They go into recession because what typically happens is the producers are in a very small concentration of countries, and they are

taking all of the revenues, and all the money that would typically

be spent in our economy for other things goes to those countries.

Thus, people’s ability to buy things and to sell things in the traditional economy is significantly compromised.

But what most concerns me, at least in the shorter term, is the

place that I come from, Buffalo, NY. Buffalo, NY, like many northeastern cities, is economically depressed. Buffalo is statistically by

population loss and job loss the weakest economy in the entire

State of New York. We also experience very cold winters. When you

look at statistics, the fact of the matter is that there is going to be

a 50 to 75 percent increase in the cost of home heating using natural gas. That doesn’t even speak to the other sources of home heating.

Additionally, this administration cuts from year in and year out

the appropriations for the Home Energy Assistance Program, which

directly impacts low income and senior citizens in the Buffalo, NY,

area, and throughout the entire Northeast and those other regions

of the country who experience inordinately cold temperatures during the winter months.

So what I would like to hear today is less of an analysis of the

problem and more solution-based responses. I know that perhaps

that sounds like an oversimplification, but I think, we have enough

analysis in front of us. We see that the natural trends, the traditional trends, have had an adverse impact relative to natural gas

supply not meeting the demand. We also see that a natural disaster has also adversely impacted the supply side of providing natural gas.

But I think what people, particularly in Buffalo, NY and

throughout this Nation are looking for, are clear, decisive answers

to these problems, both in the short and the long term. With this

expert panel of witnesses, that is what I am hoping to hear from

this testimony today.

Thank you very much.

Mr. ISSA. Thank you. I might also agree with the gentleman from

New York that we focus on, well, if we went from a SUV to a more

efficient vehicle how much fuel we could save, no question at all.

However, if you drive 15,000 miles a year on a 20-mile per gallon vehicle, you are only consuming $2,250 at $3 a gallon worth of fuel.

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So very clearly, we have been looking at the one area that has a

limit to how much we really consume and how easily we can reduce

it. Having been a Clevelander, I would share with the gentleman

I do understand it is much more difficult to find a way to keep your

home warm by simple changes in choice.

With that, I would ask that all of the witnesses rise and also

anyone who is going to advise the witnesses to take the oath.

Ms. WATSON OF CALIFORNIA. Mr. Chair, would you yield for a

just a second?

Mr. ISSA. Certainly.

Ms. WATSON OF CALIFORNIA. I wanted to announce at the end of

my statement that I wanted to submit the testimony from Neal Elliott from the American Council for an Energy-Efficient Economy

for the record.

Mr. ISSA. Without objection. That and any other revisions or

openings statements not entered here will be allowed into the

record.

[Witnesses sworn.]

Mr. ISSA. Record that everyone here answered in the affirmative.

The committee appreciates the substantive written testimony

that each witness has submitted for the record. I respectfully ask

that you consider it all heard and seen by us and use your 5 minutes of initial statements in order to add or find additional items

that you would like to have in the record. However, it’s your 5 or

so minutes, and we respect the fact that you know what you need

to present to us.

Since I have already introduced the witnesses, I would like to

start with Mr. Caruso for his opening statements or his testimony.

STATEMENT OF GUY CARUSO, ADMINISTRATOR, ENERGY

INFORMATION ADMINISTRATION, DEPARTMENT OF ENERGY

Mr. CARUSO. Thank you, Mr. Chairman, and members of the subcommittee. I appreciate the opportunity to present the Energy Information Administration’s views on the recent developments in energy markets, with a focus on natural gas and the impact of Hurricane Katrina.

EIA is a statistical and analytical agency within the U.S. Department of Energy. As such we do not promote, formulate or take positions on policy issues. But even before this tragic natural disaster,

crude oil, gasoline prices and natural gas were already at very high

levels. On August 29th, the average gasoline price was $2.61. Diesel prices were $2.59. Crude prices were about 60 percent above

where they were over the same period due to strong growth on

world oil demand, in which we have used up much of the world’s

surplus productive capacity. Refineries, not only in the United

States but in Europe and in Asia, were running at very high levels

of capacity, and the production of distillate fuels and the higher

than average refinery outages this summer led to a tight gasoline

supply.

So the picture before Katrina was a tight oil market and an even

tighter natural gas market with prices above $10 per 1,000 cubic

feet. Katrina has had a significant impact, particularly on gasoline,

diesel fuel and natural gas prices, with gasoline prices reaching

$3.07 for the national average on Labor Day. They have come down

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by about $0.11 in our survey just this Monday, but nevertheless

they are still about $1 a gallon above where they were a year ago.

Natural gas spot prices at the Henry Hub Center have risen sharply, reaching over $13 per 1,000 cubic feet on August 31st. Prices

have declined somewhat since then and are staying at about $11

per 1,000 cubic feet.

In the near-term, the outlook for the oil and natural gas markets

will depend on a number of factors, most importantly the timing

and pace of the recovery to the infrastructure and operations in the

gulf. Production of both oil and natural gas in the Gulf of Mexico

has recovered somewhat since the initial shut-in in amounts of oil

and gas. My colleagues and Secretary Watson, will go into more detail about that.

With crude oil from the Strategic Petroleum Reserve available to

refiners and the full operation of crude and product pipelines restored, the rate at which refinery capacity affected by Katrina and

which it can be brought back online is certainly a major factor

which will affect petroleum markets this winter.

Fortunately for natural gas markets, we are in the shoulder season between the period of high demand for electricity, generation

for air conditioning and the high demand for heating. The level of

natural gas in storage remains above the 5-year average, but the

disruption in operations due to Katrina is likely to reduce the

amount put into storage during the remainder of the injection season.

Our understanding with respect to natural gas production and

processing is evolving rapidly, but we are concerned that about two

or three of the remaining natural gas damaged processing facilities

may take several months—and this certainly can affect our ability

to put gas into storage for the winter. Even if the energy system

is nearly or fully restored by December, the high prices for petroleum products and natural gas are likely to remain.

In our most recent short-term energy outlook, which was released on September 7th, we used three recovery cases. I will focus

this afternoon on our medium recovery case. In all of the cases normal operations are assumed to be achieved or nearly achieved by

December. Natural gas markets are likely to stay tight over the

next couple of months as the heating season begins.

Based on present trends, we expect natural gas prices this winter

to be significantly higher than last winter, that we expect residential natural gas prices in the medium recovery case to be about 47

percent higher than the heating season of 2004–2005. And as has

been mentioned, the north central region in the Midwest is likely

to see some of the highest price increases this winter, nearly 60

percent. On a per household expenditure basis for natural gas, we

expect that the north central region will see price expenditures increase by about 70 percent compared with last year.

So clearly this winter the economic pain of higher prices for heating by either natural gas or heating oil is going to be felt across

this country, but probably the Midwest region will probably suffer

the largest increases.

With that, Mr. Chairman, I would be happy to answer questions

when you deem appropriate. Thank you.

[The prepared statement of Mr. Caruso follows:]

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Mr. ISSA. Thank you. We will hold those for the end and next go

to Ms. Watson for—the Honorable Rebecca Watson, not my ranking

member, for your statement.

STATEMENT OF REBECCA WATSON, ASSISTANT SECRETARY

FOR LAND AND MINERALS MANAGEMENT, DEPARTMENT OF

THE INTERIOR

Ms. WATSON. Mr. Chairman, Representative Watson, I appreciate the opportunity to discuss the role of the Department of Interior in meeting America’s demand for natural gas. I would first like

to acknowledge our Gulf State communities. It’s difficult to comprehend the horrific impacts of Hurricane Katrina on so many people in the Gulf of Mexico region.

The Minerals Management Service is part of the New Orleans

family. Last week, when I testified to the Senate Energy Committee, 67 MMS employees were unaccounted for. Today we have located all but two individuals, and every effort is being made to find

them. All of us at Interior extend our condolences to every individual impacted by Hurricane Katrina.

Hurricane Katrina has dealt the central Gulf of Mexico region,

its people and the oil and gas industry, a heavy blow, but we will

recover. MMS, from a satellite office in Houston is working with industry to assess damage, facilitate repairs, expedite critical business processes and resume full production of oil and gas on the

Outer Continental Shelf as rapidly as possible to meet the Nation’s

energy needs.

The oil and gas produced from the Gulf of Mexico’s Outer Continental Shelf plays a major role in supplying our daily energy

needs. It accounts for about 29 percent of domestic oil production

and 21 percent of natural gas production. The future of natural gas

production in the gulf lies in the technologically challenging frontier of deep shelf and deep water gas.

I want to have a slide put up on the screen. This map shows the

path of Hurricane Katrina. It demonstrates that it moved through

a core area of offshore operations.

Accordingly, on August 30th, 95 percent of oil production and 88

percent of gas production was shut in. Today, as of 2 p.m., 56 percent of oil production remains shut in and 35 percent of natural gas

production is shut in. Gulf of Mexico production facilities accounting for 90 percent of gulf production escaped significant damage.

However, it is important to note, as Mr. Caruso did, that critical

onshore support facilities and infrastructure sustained serious

damage. The availability of these facilities will be a crucial factor

in the recovery of the gulf’s production.

As Mr. Caruso noted, before Hurricane Katrina we were already

in a tight supply. Demand for natural gas is expected to increase

dramatically both here at home and globally and well into the future.

The Federal Government plays a significant role in helping us

meet this growing demand; 35 percent of domestic natural gas

comes from Federal resources and 50 percent of undiscovered natural gas is expected to underlie onshore lands and offshore Continental Shelf resources.

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Accordingly, developing natural gas on Federal lands is a high

priority of both the President’s natural energy policy in the Energy

Policy Act of 2005. Turning to onshore resources, five Rocky Mountain basins hold the second largest source of natural gas after the

Gulf of Mexico. Those onshore basins contain about 139 Tcf of natural gas, enough gas to heat 55 million homes for 30 years.

More than half of those lands are on public lands, managed by

the Federal Government. With high natural gas prices, development interest is high. For the past several years, the Interior Department has been implementing a balanced program to aggressively make available Federal natural gas resources, yet require industry to develop those resources in an environmentally responsible manner consistent with the laws that Congress has put in

place.

This next slide illustrates the progress that has been made in the

last 4 years. We have issued more than 17,000 permits, which is

a 74 percent increase from the last 4 years of the previous administration. Likewise, this issuance of permits has resulted in an increase in natural gas production of 17.4 percent during this same

time period.

The next slide that I would ask to be put on this screen demonstrates one of the challenges. During this same time, however,

we had pre-lease protests—these are administrative protests that

were filed at the leasing stage, and these rose an astonishing 664

percent. Appeals of leases were up 253 percent.

These lease protests slow energy development by delaying lease

or APD issuances. Leases are held up while these protests are resolved and the BLM field staff is working on addressing these protests rather than issuing APDs.

High gas prices and high demand create high workloads. As

prices rise, industry’s perspective on what they want to develop

changes. They may come in and say, ‘‘Well, this is what we wanted

to develop at this time, but these prices have made us become a

little bit more ambitious.’’ That requires us to go back and reanalyze the environmental impacts.

We are not as nimble as industry is in responding to high prices.

We can’t pour resources and people as quickly to address these

high prices. So we are not as responsive, I think, as industry would

like us to be in issuing APDs.

The good news is the Energy Policy Act is giving us resources

and new direction and new timelines to address this high demand.

We are hard at work at the Department of Interior, at the Department of Agriculture, at the Department of Energy, and other agencies, regulatory agencies, to meet the requirements in this act and

utilize the resources to increase APD issuance. We look forward to

working with Congress.

I will be happy to answer any questions.

[The prepared statement of Ms. Watson follows:]

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Mr. ISSA. Thank you. Before we move on, because I want to make

sure you have the full attention of the entire dais, not just the dais

that remains here during the vote, we are having a series of three

votes on the floor.

So with your indulgence, we are going to recess for about 15 to

20 minutes. Then all the Members will be returning directly afterwards.

With that we stand in recess.

[Recess.]

Mr. ISSA. The hearing will now come to order.

Mr. Zenker, we would look forward to your comments. Once

again, your entire written statement is in the record, so you may

revise and extend as you see fit.

STATEMENT OF MICHAEL ZENKER, SENIOR DIRECTOR,

NORTH AMERICAN NATURAL GAS, CAMBRIDGE ENERGY RESEARCH ASSOCIATES

Mr. ZENKER. Thank you, Mr. Chairman and members of the subcommittee. I appreciate the opportunity to appear before you today

to discuss the natural gas market in the United States and recent

developments from Hurricane Katrina.

The market today for natural gas is very different from the one

with which the Nation grew comfortable. Prices during the 1990’s,

as a reference period, averaged $2 per 1,000 cubic feet at the

wholesale level, reflecting abundant supply. These prices certainly

encouraged consumption of this environmentally friendly fuel, led

to restrictions on alternative fuels, and helped launch a large wave

of power plants that burn nothing but natural gas, as you, Mr.

Chairman, referred to. With the market today with wholesale

prices over $4 per 1,000 cubic feet for what is now 35 consecutive

months and over $7 averaging this year reflects a very different

market.

But I want to stress that these prices are not the result of some

unexpected mysterious force or some event that caught the country

off guard. Rather, the inability of continental supply to keep pace

with demand is the single greatest reason for the sustained higher

prices over the past few years. This supply disappointment is nothing new. In fact, U.S. wellhead capacity for natural gas has remained virtually stagnant for the last 15 years.

Drilling for gas is up in the United States by over 175 percent

since 2002, yet supply is still down over that period. There are very

few, if any, spare rigs available to drill more. Canadian supply, a

key source for the United States, has faltered since 2001. Hurricane Katrina has only added to this picture by removing some of

that scarce supply.

But beyond winter, the challenge for the next few years will be

to meet demand growth that has all but assured the power sector

will comprise the bulk of demand growth. I think we have heard

that already today. Economic expansion is going to push these

power plants into higher utilization.

The Energy Policy Act of 2005 is encouraging development of

new coal, nuclear, renewable power sources—a very important

step—but the lead time for these plants means they will provide

no relief for the gas markets for the next few years.

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With demand growth virtually assured, let’s turn to the outlook

for supply. I describe in my prepared testimony the substantial investment that we see that is under way in the energy industry to

bring new supplies. This will play out in our view and CERA’s view

as follows.

Record level drilling in the United States and Canada will just

offset declines from existing gas wells for no net growth in continental supply. Simply put, America’s breadbasket supply regions

are in collective decline, and there is not enough growth expected

from the newer but smaller regions to offset losses from the larger

ones. This assumes no liberalization in the land access rules. Significant additions of new LNG receiving terminals will allow growing levels of imports to catch up with demand. It’s going to take

some time, and it could potentially exceed demand.

Importantly, CERA sees no feasible way to meet long-term natural gas demand without substantial new LNG facilities. The supply

growth will begin to soften prices in 2008, in our view. Unfortunately that means, barring anything in the immediate term to

change that course, price relief for natural gas remains as far away

as 2008.

Does this mean that there is nothing to be done to help shield

consumers from higher prices for the winter, to Congressman Higgins’ question? No, there are actions that could be taken to soften

demand and thereby provide some price relief. Promoting conservation is the largest single action that we can do in the near term.

As an example, if all U.S. consumers turn their thermostats

down 2 degrees Fahrenheit for the coming winter, the resulting

drop in consumption of about 8 percent would be bigger than the

impact that Hurricane Katrina is causing to the markets. California, as I am sure the chairman recalls, cut electricity consumption

by a greater amount in 2001 in the electricity crisis.

In addition, relief can also be achieved by granting flexibility to

existing power plants that can burn alternate fuels. California, as

an example, could demand alternative energy from a power plant

called Mohave to keep operating. Mohave is a coal-fired plant that

is being shut down.

I want to stress that these actions, if they are to be efficacious

for the winter, should be undertaken with great haste.

Finally, let me turn to the effects of Katrina. Katrina, of course,

highlighted the precarious nature of supply in the United States,

but Katrina also highlighted the adaptive nature of the gas industry. That supply was rerouted around bottlenecks, so that destruction was minimized. Mr. Caruso highlighted that bottlenecks are

going to be gas processing plants for the next few months.

Katrina also highlights the risk of concentrating our new LNG

facilities in the Gulf of Mexico, and that is the current path the Nation is on. There is that concentration. A large hurricane less than

300 miles to the west of the path of Katrina would pass through

this growing concentration of receiving terminals. While this is not

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ricanes, it would certainly have a disruptive effect on supply in the

future.

This completes my testimony, Mr. Chairman, and I would be

happy to respond to any questions the committee may have.

[The prepared statement of Mr. Zenker follows:]

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Mr. ISSA. Thank you very much. Now let me go on to Mr.

Magruder for his opening testimony.

STATEMENT OF LOGAN MAGRUDER, PRESIDENT, INDEPENDENT PETROLEUM ASSOCIATION OF MOUNTAIN STATES

Mr. MAGRUDER. Thank you very much. You have my written testimony. What I would like to do is just point out a few significant

items of interest in that testimony.

I am here representing IPAMS, which is a regional trade organization located in Rocky Mountain area. We cover 13 mountain

States within the Intermountain West. We have over 315 member

companies that make up IPAMS.

I want to try to educate the subcommittee members a little bit

about the uniqueness of the Intermountain West and what role it

can play in meeting the U.S. natural gas demand/supply situation

right now. We are in a unique position in that we are located in

the center of the United States. Pipeline conditions right now are

delivering about 80 percent of capacity to the West, about 85 percent of the capacity going to the East. So the Intermountain West

is located in the center of the country, and we deliver natural gas

mostly to the East Coast and the West Coast.

I noticed from the make-up of your committee there are a lot of

coastal representatives here. We have an individual from New

York, California, and coastal situations.

The thing that is unique about the Rocky Mountain area is that

50 percent of the lands are owned and controlled by the Federal

Government. So that means that when we attempt to develop natural gas and oil in those lands we have to work with the Federal

Government, with Secretary Rebecca Watson’s group.

Like the Gulf of Mexico, the Rocky Mountain region is a very important source of natural gas. We produce about 22 percent of the

production for the United States. So 22 percent of the natural gas

comes out of the Rockies. It’s not by coincidence, but 50 percent of

that production is derived from Federal lands because 50 percent

of the land mass is controlled by the Federal Government.

Contrary to what Ms. Watson mentioned earlier, 60 percent of

the APDs that have been issued have been drilled in 2004, and this

is only 4 percent variance over the 5-year average. So we are executing on as many permits as we possibly can. Oil and gas operations only occupy about 1 percent of the land mass that the BLM

regulates. So we have a very small footprint within the large vast

areas of the Rocky Mountain region. Our limitations in adding

more natural gas are directly related to attaining an adequate

number of drilling permits on nonwilderness and nonpark lands. It

is important we also obtain right of ways to be able to move the

product out of those areas. You need to keep in mind that it only

takes days or weeks to drill a well in the Rocky Mountain region.

It doesn’t take months or years to drill a well. So we can drill multiple wells in a very short time period, while at the same time the

complementary permit process may take 6 months, a year, to receive a permit to drill an 8-day well. So thus, you know, as a result

of that, we have to have a large inventory of permits in front of

these drilling rigs in front of this—basically this manufacturing

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process for methane. So it is very important that we have an inventory of permits.

The current NEPA process needs to be overhauled. I think that

the BLM has done everything humanly possible to satisfy the demand of the industry. Ms. Watson mentioned that they are not as

nimble as the industry, and I can tell you we are on the doorstep

and we are trying to get every possible permit that we can get out

of there to execute and drill wells. But the process needs to be

changed. And I think it lies within NEPA, the interpretation of

NEPA and the question of whether or not we are interpreting and

applying NEPA correctly.

Now, what can we do in the near term to try to satisfy demand

for natural gas this winter? There are a couple of things you can

do. In NEPA, you have the ability to execute categorical exclusions.

This is basically where someone within the BLM at the field level

can exercise good business judgment. I don’t think we will sacrifice

any standards, any environmental standards that are basically outlined within NEPA. But basically, for us to meet the demand this

year, we are going to have to change what we currently do; otherwise we are at steady state, whatever it is today. That’s about all

we can do.

We could also consider relaxing some of the wildlife stipulations

in areas that are appropriate. The methane manufacturing business is about to shut down on November 15th. That’s when the

wildlife stipulations kick in in the Rocky Mountain region, so the

factory is about to shut down. The question is: Can we apply good

practices, best management practices, in areas that don’t affect the

wildlife and have everybody satisfied in the process?

I think in closing, I would like to say that high natural gas prices

are not the result of a cartel controlling supply. They are the direct

result of an inefficient regulatory process that governs natural gas

development on Federal lands. The Federal Government, as an

owner of the largest natural gas reserves, has a responsibility to

ensure the adequate supplies of this domestic resource owned by

Americans, produced by Americans, and consumed by Americans is

developed for the benefit of the public.

I would like to thank you for the opportunity and I am certainly

available for any questions.

Mr. ISSA. Thank you.

[The prepared statement of Mr. Magruder follows:]

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Mr. ISSA. Mr. Slocum, as with the other folks, we very much

would appreciate your expanding upon your written statement, if

at all possible.

STATEMENT OF TYSON SLOCUM, RESEARCH DIRECTOR,

ENERGY PROGRAM, PUBLIC CITIZEN

Mr. SLOCUM. Thank you very much, Mr. Chairman, and other

members of the subcommittee. I am Tyson Slocum. I am Director

of Research for Public Citizen’s energy program. We are a national

consumer advocacy group. We represent about 160,000 consumers

across the United States. And I have done an extensive amount of

research on energy markets.

I last testified before this committee last year when I talked

about the role of recent mergers in the petroleum industry, and lax

regulations were having an impact on higher gasoline prices. After

I gave my testimony, those findings were echoed by the U.S. Government Accountability Office.

We focus on energy policies at Public Citizen and how they impact consumers. Speaking of energy policies, Congress and the

White House recently passed an energy bill that was supposed to

be comprehensive, but obviously it’s not that comprehensive if we

are holding a hearing today on what we need to do about natural

gas policy. The only thing comprehensive about that energy bill,

unfortunately, was the large financial incentives to energy producers. Public Citizen counted about $6 billion in taxpayer subsidies

to the wealthiest corporations in the U.S. economy. We don’t think

that makes a lot of fiscal policy sense or energy policy sense at the

time of record high prices. The market should be providing all that

incentive, not taxpayer dollars.

There was a lot of talk here on the panel today about demand

and problems with rising demand and the Council, the American

Council for an Energy Efficient Economy, provided testimony for

the record that’s available here today that outlines some very excellent policy steps to reduce natural gas demand by 10 percent by

the year 2020. Public Citizen strongly supports backing those

measures because clearly there are things that Congress can do to

provide incentives to individuals and businesses to help us use natural gas more efficiently.

I have also heard a lot of talk here today about natural gas production. I am familiar with a January 2003 Interior Department

survey of natural gas and oil production on Federal lands that

found only 12 percent of natural gas on Federal land is completely

off-limits to drilling, and that leaves 88 percent of Federal land either completely open or partially open to drilling. I think that

should set aside any sort of argument that environmental regulations are somehow standing in the way of producing adequate

amounts of natural gas.

The one issue that I have not heard today is the problem of regulation over natural gas markets generally. I think it is very important to note the research that I compiled as part of my testimony

that documents the significant problems that have been going on

with natural gas companies in the United States. We have documented that America’s natural gas companies have been fined over

$2 billion in the last 3 years for manipulating natural gas markets.

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This clearly shows that we do not have an adequate regulatory

framework over natural gas markets, and we feel that there is

market manipulation continuing today in the United States. Absolutely, supply and demand is playing a role here, but we think that

the evidence of massive amounts of market manipulation, as evidenced by the fines levied by Federal Government agencies, shows

that we need a stronger set of regulations, kind of like what Congress did when they passed the Sarbanes-Oxley bill in the summer

of 2002. Congress was presented with clear evidence of systemic

fraud and abuse in the U.S. accounting sector and so as a result,

Congress saw fit to greatly improve and strengthen regulatory

oversight over that industry.

Well, you forget that many of the accounting scandals were heavily concentrated in energy companies. And I think that there continues to be inadequate government oversight, and so Public Citizen has four basic regulatory suggestions that we offer to this subcommittee and we urge you to support them.

The first one is to establish a just and reasonable rate standard

over the production of natural gas. Currently, such a standard exists for the production of electricity. It is enforced by the Federal

Energy Regulatory Commission. And because of that standard,

companies like Enron that were engaged in illegal manipulative behavior during the West Coast energy crisis are now forced to provide refunds to West Coast consumers. In fact, just several weeks

ago, Enron had to provide $400 million in refunds. That was only

possible because the Federal Government has regulatory jurisdiction over the production of electricity. No such regulatory oversight

exists over natural gas production.

Second, we need to restore transparency over natural gas trading

exchanges. Since 2000 these exchanges were deregulated, and we

support legislation that was introduced in April by Missouri Republican Sam Graves that would restore and strengthen transparency

and accountability over natural gas trading markets.

Third, Public Citizen supports improving trading price limits.

Right now there are very strict price limits on agricultural commodities like beef and lumber and milk. This is to reduce volatility.

The price limits over natural gas are laughable. They are only $3

per 1,000 BTUs, and if that threshold is crossed, trading is only

suspended for 5 minutes. This encourages a great deal of volatility

and it allows hedge funds and other financial players to make a lot

of money at consumers’ expense.

We also support exploring the concept of natural gas storage requirements modeled on the Federal strategic petroleum reserve.

Thank you very much.

Mr. ISSA. Thank you.

[The prepared statement of Mr. Slocum follows:]

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Mr. ISSA. And with that, I am going to ask the first round of

questioning. And perhaps just a comment to Mr. Slocum. You

know, I am a little older than you are, and I have been in towns

that enforced their speed by having a speed trap and caught everybody and collected a lot of money. And I have been in towns where

they just sort of ignored the speed limit and people drove 10 miles,

20 miles, 30 miles over the speed limit.

It was a surprise to me that in your opening testimony that you

indicated that the amount of money you collect is an indication

that there is no enforcement, or that there is a pervasive problem.

I would say from my experience that the more money you are collecting, the more an agency is doing its job, and perhaps even collecting money when somebody even makes an unintentional error

but makes an error for which there is fining. And you might want

to try to in your future testimony try to break down the fines so

as to eliminate logical good enforcement that is doing its job from

the possibility of, as you said, a widespread lack of good enforcement. Today obviously we don’t have the facts for it, but like I say,

I look at $2 billion as a significant amount of enforcement.

Perhaps I could open up by quoting yesterday, while touring the

gulf and assessing the damage of Hurricane Katrina, Energy Secretary Bodman said, ‘‘The great concern is about natural gas.’’ Are

we in a crisis? Will we have enough natural gas to heat our homes

and run our factories this winter, and at what price?

I guess for those who were involved in the pricing—and I am

going to start with Mr. Magruder—are we going to have enough,

and at what price?

Mr. MAGRUDER. I think we are in a situation right now where

production is at pretty much a steady state. If you take the Rocky

Mountain region as an example and its ability to deliver more natural gas, I’d tell you yes. We do have the ability to immediately deliver for natural gas because the wells don’t take that long to drill.

The infrastructure is already there and we can execute and eliminate some of the pressure this winter. I don’t think it’s going to be

a solution, and I don’t have the crystal ball to tell you what the

price is going to be.

We are certainly not pricemakers, as I mentioned in my testimony. But I just know if we don’t take any action, we can expect

higher prices and the current process is not going to work. I would

hope that this subcommittee has the power to enforce or recommend some changes, and I personally think it is all behind the

NEPA process. If you look at the way that the industry is able to

execute and perform on State and fee lands in the same States and

in the same vicinity, just a sand wedge away from a Federal lease,

we are able to execute it within a matter of weeks. But it takes

up to a year in a lot of cases to do the same thing, same procedure,

same execution on a Federal parcel.

So I think that yeah, we are in for a pretty tight winter if we

don’t take any action right now. We’ve got Katrina that’s contributing to the supply picture. I don’t know if we know the total outlook

of the results of Katrina at this time. I think the jury’s still out on

that. But the Rocky Mountain region and the players in the Rocky

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ity. And I don’t think we will sacrifice any of the NEPA standards

in the process.

Mr. ISSA. Thank you.

Ms. Watson, I have a question and maybe—I want to make sure

you’re the right person for it. An application to drill taking 6

months for an 8-day drilling—there was some testimony that indicated that this, that the ratio between applications and actual drilling, I think 60 percent were being drilled and 40 percent had not

been drilled, if I understand correctly, creating a backlog of approved applications—costs the U.S. Government substantially zero.

Why wouldn’t we want to encourage the greatest amount of

preapproved applications, the greatest amount of ability to preload

flexibility, particularly for a crisis like this?

Ms. WATSON. Well, we are interested in processing applications

for permit to drill, so we have zero incentive not to process them.

But as Mr. Magruder testified, we have laws that we have to comply with—NEPA is just one of them—on Federal lands. In addition

to the National Environmental Policy Act, which is a process to

take a hard look at the environmental impacts, we also have to

comply with the National Historic Preservation Act. States do not.

We also have to comply with the Endangered Species Act, section

7. States do not have to comply with that. They have to avoid the

take of endangered species. We have the Clean Water Act, the

Clean Air Act. In other words, we have a number of Federal environmental laws that Congress in its wisdom has passed to protect

and balance the environment with the need to produce energy.

But I was struck by something that you said at the beginning of

this hearing. You—or actually it was Representative Higgins, said

this: He wanted to look at solutions. And I would like to identify

for you that in the Energy Policy Act, we have some solutions,

some of which are in effect right now, and they also go to a problem that Mr. Magruder identified. One that was put in effect the

day the President signed the bill on August 8th is a requirement

that we have to tell industry within 10 days whether their application for permit to drill is complete. If it is complete, BLM must

process it in 30 days. That is in effect right now. We are going to

issue two instruction memorandums to the field—they just went

out of my office yesterday—to instruct our field managers on these

provisions of the act so they understand what they mean, and so

we are getting to work on that provision of the act right now.

Another provision that went into effect the day the act was

signed are categorical exclusions that Mr. Magruder talked about.

There are five categorical exclusions for APDs that are in the act;

and again, we are working with the Forest Service and the Bureau

of Land Management, because they apply to both of our lands, to

get that written and prepared and out very shortly. It’s in effect

now, but we need to give the proper guidance to our field to implement that.

And finally one of the issues that was raised on the issue of wildlife stipulations in year-round drilling, that is a very difficult question, the issue of balancing wildlife. Wildlife is important to many

of these Western States. Many of those States have a significant

income from hunting. It’s part of the lifestyle of that State, part of

what they look at as well as whether they enjoy hunting or not.

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We work with the State game and fish agencies and hunting

groups to try and balance that. We are working right now in Wyoming and looking with a couple of companies up there at yearround drilling. How can we do year-round drilling and still keep

the wildlife herds at a good level?

We also implemented a policy just this summer on offsite mitigation. So while we are going to have wildlife impacts, we are going

to mitigate those impacts through utilizing money that companies

pay to purchase acreage elsewhere. And so we are trying to be

flexible to address some of the concerns that industry has brought

up.

Mr. ISSA. I appreciate that.

And my final question is actually, again, or at least the first

round is again is for Secretary Watson and Mr. Magruder.

I saw that litigation in regards to natural gas production on public lands has greatly increased. To the extent that we have legal

maneuvers tying up BLM resources and slowing down the natural

gas process, is there a way that we can qualify and reduce these

delays; and particularly noting that this is a jump from the Clinton

administration at 666 protests to 4,429 protests over a comparable

period? I don’t think there is any industry that is growing faster

than this.

Ms. WATSON. It seems to be a booming industry. I’ll agree with

you there. It’s quite a jump.

Mr. ISSA. So there are no lawyers considering going into gas

drilling, I guess, at this time.

Mr. MAGRUDER. They don’t need to take the risk. All they have

to do is file the case.

Mr. ISSA. What can we do? Are there Executive powers that can

be used to somehow streamline this process? Because it’s not only,

obviously, the quantity but the time they are consuming and the

gas that isn’t coming on-line as a result.

Ms. WATSON. I think the GAO did a study and examined the administrative appeals process and compared how the Minerals Management Service and the Bureau of Land Management handles

these type of appeals, and identified the fact that the Bureau of

Land Management has one more step in the process than does

MMS. There is administrative action that the Secretary could take

to address that.

There is always, of course, Congressional action that Congress

could take to address this situation. It is a tough situation. I mean,

clearly there are folks out there that do not want to see public

lands developed for any number of commodities’ uses. Natural gas

production is only one area. We are also seeing it in the renewable

energy as wind energy is being developed. Geothermal. In your

State of California, folks are stopping that as well.

Mr. ISSA. I understand that now wind is not good enough because a bird dies. So it is going to be interesting to find out what

form of energy is acceptable.

You know, solar also uses a lot of water to clean the lenses. It

is interesting that everyone’s found that conservation is the only

answer so that we can save ourselves into energy self-sufficiency

while producing zero energy. I have always found that to be interesting. Yes.

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Mr. MAGRUDER. I would like to offer—we were talking about solutions, and I am certainly glad to hear that we have some memorandums that will be sent out pretty soon. And believe me, IPAMS

is there to help implement those and assist any way we possibly

can.

But I’d like to suggest two things. And I think that—you know,

we have existing locations using directional drilling technology; we

can drill from the existing locations. If we were to introduce an

order immediately that it’s OK to operate within the given best

practices defined for a given area that has a known recess, you can

drill from the existing locations, we really don’t do any further disturbance. We don’t build any more roads. All we do is drill a second

well from a given location. That could immediately offer more production and we could start that immediately.

And the other thing is to do program-wide type permitting, similar to what the BLM is currently doing in the Powder River Basin.

They will approve as many as 40 wells in one application. In other

areas of the Rocky Mountain region, with the exception of that

area, it has to be done site specific. Each individual well has to be

permitted. If we are in a given area where we’re basically just

manufacturing natural gas and we are applying the same best

practices approved by the BLM, the question is why can’t we do—

approve a certain area for development as opposed to very site specific, as long as we conform to the archaeological studies and everything else that was mentioned.

So I think there is a lot of flexibility that can be granted and still

meet the guidelines of NEPA and all the other requirements. Those

two things would offer immediate increase in production.

Mr. ISSA. Excellent.

And with that, I would recognize the gentleman from New York,

Mr. Higgins, for his round of questioning.

Mr. HIGGINS. Thank you very much, Mr. Chairman. Just again,

thank you for your testimony. It’s very helpful. But it’s also very

revealing.

I think about where the problem is. There are some pretty divergent views here. Some are suggesting more regulation, others suggesting less. Some are suggesting that the energy bill was helpful.

Some are suggesting that the energy bill just passed was harmful.

The fact of the matter is it just seems like we’re stuck. And we’re

stuck because we have become increasingly reliant on natural gas

not only to heat our homes directly, but also as an alternative fuel

source to electricity production. So whether you’re paying a gas bill

this winter or you’re paying an electricity bill, that bill is going to

be profoundly influenced by the price of natural gas.

Mr. Slocum, you had mentioned that the new energy bill had some $6 billion in industry subsidies. Could you elaborate a little

bit further? I don’t quite understand.

Mr. SLOCUM. Sure. Well, I mean first of all there are $27 billion

total in subsidies to the energy industry. I isolated $6 billion to the

oil gas and natural gas industry. The largest tax break for the natural gas industry was just over $1 billion in tax breaks to allow

them to depreciate the value of their natural gas pipelines much

quicker than under current law. There are additional new government spending programs such as the new ultra deepwater drilling

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program that is $11⁄2 billion in new government spending in direct

subsidies to encourage research and development in new ultra

water drilling in the Gulf of Mexico. There is an additional $1 billion in tax breaks for geological and geophysical expenditures that

allows companies to write off more of the cost of production.

Again—and then there’s also a series of royalty relief programs.

Again, Public Citizen strongly feels that the record-high commodity

prices for natural gas and oil should be providing all the incentives

necessary to the industry to provide this product and that scarce

taxpayer dollars should not be given to a highly profitable industry.

Mr. HIGGINS. You know, the other issue here is the whole impact

of Hurricane Katrina. Based on this map that was provided in our

packet here, I mean, just the cluster of oil and gas platforms that

are seemingly disproportionately located on the border of host

States indicate a further problem that may be resolved in the

longer term but obviously presents some severely complicating factors relative to the price of natural gas this upcoming heating season.

On the issue of conservation, a number of you, all of you, have

made, I believe, specific reference to conservation, and it seems like

there is always a rhetorical run-up to the whole notion of promoting conservation toward the goal of reducing dependency and reducing costs. But I have reviewed the energy bill just passed by

Congress, and I don’t see it. I don’t see a real and meaningful Federal policy with respect to conservation for individuals and for businesses. And when I say real and concrete, I mean meaningful financial incentives, meaningful incentives to really pull back or reduce significantly our consumption.

Any thoughts with respect to that by any of you?

Ms. WATSON. Well, I think the—when we speak of the energy bill

being comprehensive, I would like to defend the fact that it is comprehensive; and the bill begins with conservation, looks at supply

and includes both renewable energy, fossil fuels, future sources

such as hydrogen and methane hydrates and then looks at research

and reports to develop energy. And as to conservation there are

several measures in there.

Now, what is meaningful is certainly in the eyes of the beholder.

But there are measures there for Federal agencies with our fleet,

and the Federal agency is the largest consumer of energy in the

Nation. So these directives to Federal agencies to make their buildings and their fleets more efficient will have an important impact

on energy supply.

And I will tell you that the administration right now in light of

Hurricane Katrina is looking at these conservation measures in the

short term, and the direction of the energy bill is in there and it

is an important prong. Now, it certainly is not what everybody

wanted, but it is something more than minimal.

Mr. HIGGINS. You know what I think it does now? Here’s what

I think it does. I think it provides just enough incentive for the development of alternative energy sources to say that we are doing

something, and disproportionately provides incentives to the status

quo. And the problem with that for me is that it doesn’t change

anything. It doesn’t change anything. Because we are talking about

it today, we probably talked about it last year at this time and the

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year before, and we’ll be talking about it 10 years hence; because

I think when you look at our whole dependence on energy sources,

be it natural gas or foreign oil, we’re really stuck. Unless we take

aggressive measures to promote aggressive measures, real measures to promote real conservation, we’ll continue to be stuck in this

rut.

The people who are held hostage are not the people who are

being talked about here today, and that’s the people who I represent, i.e., those who are going to get devastated in the next several months with not only extraordinarily high home heating costs,

but extraordinarily high gasoline prices at the pump. And of this

exacts a devastating impact on the economy of regions, particularly

those that are most vulnerable in terms of climate, in terms of economics, but it is devastating the economy of this Nation as well.

In my hometown we used to have a place, called Buffalo Color.

Buffalo Color used to manufacture—a chemical company—indigo

dye, which was the supply source for all of the blue jean companies. One of the consequences of high natural gas prices is devastation of the chemical industry, including Buffalo Color in my community. So from an economic standpoint primarily, but there are

so many other secondary impacts that filter through this economy

that are really hurting us badly.

I think it was Mr. Slocum who talked about other industries

where problems had been identified, be it the financial or accounting industries, aggressive regulation followed which seemingly provided safeguards. I would rather not have to take into consideration more aggressive regulation of the energy industry. But toward the goal of greater transparency, toward the goal of greater

accountability, toward the goal of fairer gas trading prices, that is

something that this Congress needs to look at, because if we don’t

take more decisive action, more meaningful action, more real action, the problem is only going to get worse; because as all of you

have agreed, the cost for natural gas increases roughly with the

rate of inflation. As inflation increases, those prices will increase,

and this is what will hurt our consumers and ultimately the world

economy, and, more importantly, the U.S. economy.

So, but I thank you. This was very helpful and you were all very

informative and forthright. Thank you.

Mr. MAGRUDER. Mr. Chairman, I would like to comment on one

statement earlier about all the incentives that were offered. I can

guarantee you for an independent producer in the Rocky Mountain

region, there were really no incentives offered in the energy bill

other than greater flexibility on access, which we have talked

about.

We have a pilot project that was incorporated in the energy plan,

energy bill, that identifies seven high-priority BLM offices in the

Rocky Mountain region. That is really the only benefit that we

truly gained.

We actually lost ground. If you had to score the energy bill on

our balance sheet, we actually lost ground. So it may be that deepwater drillers in 7,000 feet of water have an incentive. My hat’s off

to them for drilling in 7,000 feet of water and willing to take that

type of risk. But in the Rocky Mountain region for the average

driller and the average producer, other than the pilot program that

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the BLM is implementing right now to try to beef up the output

of permits in the seven critical offices, really that’s the benefit and

that’s the carrot that we are trying to bring to fruition. So the big

question we have as an independent community, when will that be

put in place?

So if there is anything that you can do to help the BLM right

now, it’s to get behind that pilot program and make sure that’s implemented. And I would seriously reconsider some of the actions

that we could possibly implement and take immediately, drilling on

existing locations in the Rocky Mountain region, that could offer

additional production also.

Mr. ISSA. Thank you.

And with that, we would recognize the gentleman from the drilling of oil and natural gas region, the gentleman from Texas, Mr.

Marchant.

Mr. MARCHANT. Thank you, Mr. Chairman. My questions are for

Mr. Caruso, Ms. Watson, and Mr. Zenker. And it has to do with

the liquefied natural gas market.

Just a few months ago, I had an opportunity to go to South

America on a narcoterrorism fact-finding trip. But while we were

down there we were lobbied, and pretty heavily, about the existence of a lot of liquefied natural gas in South America and its

availability and how cheap it was if we could just find a way to get

it into the United States.

Just recently, in Secretary Norton’s comments about the storm in

the gulf, she talked about the fact that there is really no world

market yet for liquefied natural gas.

Could you comment about that whole market and did the energy

bill effectively address that issue? How long would it take for those

markets to kick in if we were equipped to have docking stations,

etc.?

Mr. CARUSO. Yes, that’s an excellent point. I think our—the Energy Information Administration and, I think, Mike Zenker’s presentation from CERA today are pretty much in agreement that if we

are going to meet the kind of demand outlook that most forecasters

are expecting, LNG will have to play a huge role in the supply of

LNG from the existing facilities in Trinidad. Algeria and Nigeria

will need to be supplemented. We expect to see a lot coming from

Qatar in the Persian Gulf. But there is also, as you point out, potential from South America—Peru, Bolivia, Venezuela in particular—in addition to the existing facilities in Trinidad.

So we’re looking for a quadrupling of the amount of LNG coming

into this country compared with what it is today over just the next

10 to 15 years. So we need to do our part, which is building

regassification facilities, which are I think well underway, with a

large number already approved by FERC and the Coast Guard.

But the supply side also needs to be dealt with, and that is the

point you have made about gas in South America and elsewhere

that needs to be liquefied. So we’re looking for LNG supplies to, we

think, put some downward pressure on gas prices, but that is going

to take time. We don’t see a substantial amount of LNG increments

beyond the existing facilities until about late 2007 and the beginning of 2008.

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Mr. MARCHANT. Do you find that—is there a built-in disincentive

for the drillers and the domestic producers who are the same people that are importing the liquefied natural gas and regassifying it

and putting in the pipelines? Are they the same companies?

Mr. CARUSO. Some are. You know, there are some of the major

oil and gas companies that are investing in regassification as well

as those who are not, who are more directly involved in the foreign

supply such as British Gas and others. But I would say a substantial share of the new regassification facilities are also the existing

oil and gas companies.

And the point of the energy bill, there was a section in that bill

that did facilitate the permitting of regassification under FERC jurisdiction, which I think will be helpful, although as we found in

Ms. Watson’s comments that there are still a number of other hurdles with respect to State and local opposition as well.

Mr. MARCHANT. Thank you.

Mr. ZENKER. If I could add to that. Certainly these prices have

triggered a huge enthusiasm to build LNG in North America.

We’ve gone from LNG not really being even an issue for North

American natural gas 5 years ago, to the point where we have far

more terminals than are needed. This industry has demonstrated

again and again that it will do a good job of overbuilding the market and pressing prices back down quite rapidly.

With LNG, I think what some of the overseas owners of gas are

looking at, is that just a few years ago gas prices in the United

States were too low to justify the construction of these terminals.

So while there’s a lot of enthusiasm, there’s also a lot of risk in

putting a $5 billion liquefaction cargo container and regassification

terminal program together.

That said, I agree with Mr. Caruso that enthusiasm is translating into construction. We are going to see huge growth in shipments of LNG into the United States. That’s starting already. Unfortunately that’s a few years out. The big new volumes are in

2008. And we have more terminals under construction in the

United States than we are going to need. That’s the good news.

The tricky part is that the supply piece, the areas that you visited, that’s going to be the pacing item, the building of what are

called the liquefaction facilities to put the cargoes in, the liquefaction, the LNG tankers and then transport to the United States.

Our long-term price outlook suggests that LNG is going to significantly dampen prices in 2008, so it’s a very critical part of the outlook.

Mr. SLOCUM. If I may add something on LNG. I am sure that

Congress has held many hearings talking about the dangers to national security of being reliant on OPEC member nations for our

crude oil supplies. I can safely predict that if all of these LNG facilities are constructed in the United States, 10 or 15 years from

now Congress will be holding hearings about how did we allow our

country to become reliant on OPEC for natural gas. Because that

is where the LNG is going to be coming from; from OPEC. So I

think that is a very important consideration to make.

Also, the energy bill that was passed in August greatly impedes

the ability of State governments to adequately oversee the construction of these LNG facilities. I personally work with about 100

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community organizations across the country that have raised significant concerns, and their ability in our democracy to have adequate oversight over the permitting and construction of these facilities is hampered by the energy bill, which gives FERC exclusive jurisdiction over the construction of these facilities.

Mr. MARCHANT. Thank you very much.

Mr. ISSA. Before I recognize the ranking member, I should disclose that I was on the Energy and Commerce Committee as a

member at the time that we recognized that there are NIMBYs;

and I guess you pronounce them NIAOBYs, the ones that are not

in anyone’s back yard. If any of you have ever tried to put an LNG

facility in, what you discover is there is no back yard that wants

it. There never will be a back yard that wants it. I’m not saying

there won’t be a small city, but there’ll always be somebody in the

area that doesn’t want it.

So at least from this Member, on a bipartisan basis, I actually

think that one of the things that the Congress has done that was

very important was centralizing to the Federal Government the authority, recognizing that the gentleman from California, the gentleman from Michigan, Mr. Dingell, and all the rest of us, certainly

hear from our home but are filtered through the greater national

need.

I would like to, before I pass it on, just have one quick question.

Mr. Zenker, if I understood correctly, you said there are too many

facilities being built, physically under construction. My understanding is there are zero in California and as all of us from California

know, there isn’t enough capacity right now to guarantee natural

gas coming in from the gulf area. So if I could modify what I think

I heard you say is, in some places there is an excess of construction, well, at least in California there isn’t any construction and we

are an area at the end of the pipeline. Is that correct?

Mr. ZENKER. Yeah, that’s a good clarification, Mr. Chairman:

And to followup on that, you are right that we’re seeing a growing

concentration of the new construction of LNG receiving terminals

in the gulf, specifically in two Louisiana parishes and in the eastern portion of Texas, and not in the consuming markets of California or the eastern seaboard. When I said we are, maybe the more

appropriate term would be we’re seeing enough construction of

regassification terminals relative to the liquefaction facilities that

are coming on, that will not be the constraint in bringing LNG to

the market. However, we aren’t seeing them built in the consuming

markets.

Mr. ISSA. Thank you. With that, I’d recognize the gentlewoman

from California, Ms. Watson.

Ms. WATSON OF CALIFORNIA. Thank you so much, Mr. Chairman.

In noticing during Katrina, the fact that many people could not

escape the depressed area of New Orleans because, a, they didn’t

have automobiles or, b, they could not afford the gasoline, and all

of us saw lines as long as 5 miles with people waiting 5, 8 hours

just to get gas, and then to get to the pump and see the prices.

Well, I call that gouging. So I know that there is a great deal of

profit attached to the production of energy, be it natural gas, be it

gasoline or whatever.

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I want to know—and I am going to direct this one to Mr. Tyson

Slocum because he is here representing Public Citizen—what can

we do in terms of public policy, Mr. Slocum, to protect our environment, to address the demand, and to make these different kinds of

sources of energy affordable?

Mr. SLOCUM. Representative Watson, first of all, you are absolutely correct that there is indeed a strong correlation between the

record profits being enjoyed by oil companies and the record prices

being charged to consumers. The EIA compiles information, for example, on profit margins in the U.S. refining industry. In the

1990’s they were consistently around $0.20 a gallon profit margin.

In 2004 that profit margin had jumped to $0.40 per gallon. And because large oil companies like Exxon Mobil and Chevron Texaco

and BP are monopolies, they’re vertically integrated. They have oil

production in the United States and all over the world. They own

oil refineries. They have other downstream mechanisms. You’ve got

a lot of control over the market.

As I mentioned in my testimony, it’s not just Public Citizen coming to that conclusion, it’s the U.S. Government Accountability Office, which showed in a study in May 2004, that recent mergers

have directly led to high gas prices and, in fact, the largest five oil

companies operating in the United States today have enjoyed profits of $254 billion since 2001. That’s a very healthy profit margin.

So what can be done about it? Well, first of all, we clearly need

to do something about demand. Our Nation’s fuel economy is worse

today in 2005 than it was in 1987. That’s because of our appetite

for fuel-inefficient automobiles like SUVs that have a loophole from

the standard fuel economy rate. This is where the energy bill really

failed to address the fundamental problem, because the United

States is the largest consumer of oil in the world. We use 25 percent. So unless we address that, we are not going to be able to get

our way out of this crisis. Remember, the United States is the

third-largest crude oil producing Nation in the world and we are

one of the largest natural gas producers. Even if we doubled our

oil production to match that of Saudi Arabia, we’d still be importing half of our oil. So we are never going to be able to produce our

way to independence, and that’s where the energy bill fails the

logic test. We need to address demand.

Second, I think that we should order an immediate investigation

into allegations of price gouging by oil companies. We already have

evidence presented by the Federal Trade Commission in March

2001 that major U.S. oil companies were intentionally withholding

supply from the market in order to drive prices up. However, because no evidence of collusion was found, there was no violation of

antitrust law, a clear loophole in our Nation’s antitrust system.

I think that critical commodities, whether they be Enron’s control

over electricity, whether it be natural gas companies, or whether

it be oil companies, should not be able to intentionally withhold

supplies in the market. That should be illegal and I think that an

immediate investigation should be commissioned by Congress.

Ms. WATSON OF CALIFORNIA. Let me just do a followup question.

You said that it should be illegal. What would be, or who would

be the body that would declare those activities illegal? Where do

you see—who has the authority to do that?

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Mr. SLOCUM. Well I think the Department of Justice would be

reasonable. I mean, they enforce our Nation’s laws, and I think

that you can have some clear laws on the books that oil is a critical

commodity in the U.S. economy and should be treated as such. It

should be treated a little differently, especially when people like

Federal Reserve Chairman Alan Greenspan talk about the severe

negative economic consequences of sustained high energy prices.

So there is a national public interest involved here in making

sure that there is a direct connection between high prices and supply and demand. Clearly supply and demand are driving higher

prices, but I think that an investigation is warranted to find out

whether or not there is anything going on above and beyond that.

Ms. WATSON OF CALIFORNIA. Now, this I am just putting out for

anyone who wants to address it. But I missed your testimony and

I’m sorry that I did that, particularly my relative over there, Watson. But do you think that our laws are adequate when it comes

to conservation and environmental protections? What do we need

to do so that in our quest for energy sources we do not continue

to pollute our environment?

And by the way, I live in Los Angeles under the flight path going

to LAX, and they start to reduce their gasoline as they come in toward the airport. You can go outside and you can run your hand

across the panes and it’s black. So I know that gets into my carpeting, it gets into my nostrils, and everybody else’s that lives in my

household. So our environment certainly has been changed because

of our use of these fuels and all.

So what do you suggest in terms of conservation? Do we have

laws on the books already to take care of this? How do we protect

our environment, therefore protecting the health of our citizens?

Anyone want to comment?

Ms. WATSON. Well, I think we, as I said in my testimony and in

answer to some of the questions, we have a number of Federal laws

on the books to protect the environment that Congress has passed

over the last 30 years setting standards for clean water and clean

air, protecting our cultural history, history of our Nation. We have

laws to protect wildlife, endangered species, as well as other wildlife. So we try to balance the protections of those important values,

that quality of life that comes from a clean and healthy environment with the quality of life that comes from affordable energy.

You spoke eloquently of the impacts on the elderly and the poor

in our Nation from high energy prices. High energy prices coming

from a tight supply impact our quality of life. Equally so, a bad environment impacts our quality of life. And the trick for a Federal

manager such as myself is trying to find that right balance so that

we protect the environment but get the energy that our citizens

need to have a quality of life that they can afford.

I think we have good environmental laws in place. We heard testimony that the processes that we have can sometimes pile up one

on top of each other and really impede our ability to get energy out

in the timeframe that we need it. Right now we have high demand

and lack of supplies: Can we work within this web of laws to get

the energy out in time to get the prices down so they don’t impact

your constituents? That’s the difficulty.

Ms. WATSON OF CALIFORNIA. Can we do more?

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Ms. WATSON. I think we can always do more. I think that we as

American citizens can do more to conserve. I think that we in this

room, many of us are leaders, and I think we all can lead by example and help educate the folks.

One of the things that I have found in my job is that many of

our citizens don’t understand much about energy, where it comes

from, how we can impact our use of it. A simple thing, turning

down the thermostat can have a huge impact. Turning lights out

in a room. Again, California set an example when they had their

energy crunch. They had a campaign of education to their citizens.

They were able to reduce energy consumption between 6 and 12

percent, which had an impact and helped them get through their

crisis. I think we do more in that arena. The energy bill points a

direction there.

The President’s energy policy also has conservation prongs. We

in the Federal agencies can and have been doing that. Industry has

done that over the last 30 years. But we all can do more and I

think it’s a public education effort that we need to engage in.

Ms. WATSON OF CALIFORNIA. I come from a State—we come from

a State where we love our automobiles. Our automobiles speak of

who we are. You know, you don’t ask a person what kind of work

they do or what’s their family history. You ask what kind of car

do you drive. I always use this test when I go into a high school

auditorium speaking to students, you know: How many of you

drive? How many of you want to drive? And it never fails, every

hand goes up. Either they drive or they want to drive. I ask them

what is the speed limit, and somebody will say 50, somebody will

say 75. I said, you’re all wrong; it’s whatever we say it is.

Do you know we control everything that has to do with the car?

We tell you how many passengers can ride in it, how you have to

ride in it, what beverages you can have in it, what condition they

have to be in, what color you paint it, how much you pay for it in

terms of taxes, where you park it, on and on and on. That starts

bringing something home to them.

What I feel is that we probably are the greatest violators in the

State of California. My colleague, I don’t know how many cars you

have, but you can only drive one at a time.

Mr. ISSA. Fuel consumption is not based on how many are in the

garage, it is based on how many miles you drive and how much

mileage they get.

Ms. WATSON OF CALIFORNIA. And what kind of fuel you have to

put in it. Our kids—you are right, I am saying all of this in support. We have to do a better job of educating. Does anybody know

about these doughnuts? That means you drive as fast as you can,

you spin on the rims. You can see it. They do it at 4 a.m., by the

way, from 1 a.m., to 4 a.m. You can see—I guess the rubber on the

wheels—and that is using energy.

So, I think one way is to really do a better job in our elementary

schools. But if any of the rest of you—I mean, if you own six cars

that use diesel fuel and you can only drive one at a time, and when

you get out there, you are expending all of that time, or maybe

each one of your kids drives one. I am just wondering what we can

do, because we really have a challenge.

Mr. ZENKER. Representative Watson, if I could add to that.

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Ms. WATSON OF CALIFORNIA. Yes.

Mr. ZENKER. I am also from California. I did live through the

California electricity crisis. California did set an interesting but

cautionary example for energy conservation. Just for historical

precedent, American consumers have trimmed on a per customer

basis about 30 percent of natural gas per household since 1970.

So these are the effects of energy efficiency programs implemented for appliances, building codes, and so forth. Home heaters—water heaters have become much more efficient.

In terms of what has been implemented to cause very immediate

or measurable impacts in the short term, California is often held

out as a leading example. But living in California and having followed the energy markets during that crisis, we saw that consumption of electricity in natural gas continued unabated and grew

through the crisis until we finally faced real blackouts. Utilities implemented an incentive program called the 20/20 program, which

finally put an incentive on top of increased prices in front of consumers. They responded by cutting—9 percent is the number that

we came up with, electricity consumption in one-quarter, very swift

change and an almost equal amount of natural gas.

However, when those incentives are removed, gas and electricity

consumption rebounded to near pre-crisis levels. So it showed that

continuous incentives are required to cause continuous conservation by consumer, at least in the current mindset.

Mr. ISSA. Thank you. Being a San Diegan, very specifically, part

of California, we delivered almost from the beginning of the crisis,

far more than the 6 to 9 percent, because our prices went up immediately. Unfortunately, and I am not trying to be partisan here, the

history uniquely was it was probably the only time in which there

was a short supply while wholesale price went up, retail prices

were maintained, and as a result, consumption didn’t go down. We

simply had Representative Watson and my constituent—deliverers

of electricity, go bankrupt. But we share with some regularity comments about Enron, WorldCom and other companies that have

abused the public trust. But certainly Pacific Gas & Electric was

abused by a system that said that you will pay for and you will sell

for the same amount, even when it becomes subsidizing retail price

to where you are delivering the electricity for less than you pay for

it wholesale. Hopefully, we will all learn that when it comes to conservation, that is not the right way to attain it.

I am being cautioned by my able staff that it is time to bring this

session to a close. With your indulgence, members of the subcommittee will be submitting additional questions in writing.

But with that, I want to thank all the panelists for their candid

remarks in addition to their written testimony. Today our witnesses confirmed that domestic production and current imports do

not give us the flexibility and supplies to meet demand and reduce

prices from the high level they are—the unbelievably high level

they have now obtained. The vulnerability of concentrating much

of our energy infrastructure in one region, the Gulf of Mexico, is

another real issue that was brought up here today.

We must also insure that demand is not spurred by becoming

more dependent on natural gas for new electricity. Natural gas is

an efficient fuel that is essential to our economy. The choices we

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make affect our industry’s competitiveness, our employment and

the prices we pay to heat and cool our homes.

We must stay focused. We must insure that we make the tough

choices to meet our energy needs, both on the supply and on the

conservation side. Natural gas supplies are too important to our

country to do otherwise.

We will hold the record open for 2 weeks from this date for those

who may want to submit for possible inclusions. With that, once

again, I would like to thank the panel, and we stand adjourned.

[Whereupon, at 4.45 p.m., the subcommittee was adjourned.]

[Additional information submitted for the hearing record follows:]

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